Russell Napier and Andrew Smithers Fail to Find Value in U. S. Stocks
MoneyWeek (the UK’s best-selling financial magazine) editor-in-chief Merryn Somerset Webb has written about the latest views of financial historian Russell Napier of CLSA and economist Andrew Smithers.
Both Napier and Smithers focus on the true value of stocks as indicated by the Cyclically Adjusted Price Earnings Ratio (CAPE) and the Q Ratio.
According to Webb, the U. S. stock market currently trades at a CAPE ratio of 22. This is not the highest level ever, but it is on the expensive side historically.
Napier told Webb investors buying U. S. stocks when they are this expensive can only expect annual returns of 0-4% over the next decade.
What you really want to do is to wait and buy when the market hits – or falls below – a Cape ratio of ten times. Investors who have bought there (in 1929, in 1937 and in 1977) saw real returns of between 11 and 23% in the following ten years.
From her interview of Smithers Webb learned that the only net buyers of U. S. stocks have been companies (including both share buybacks and purchases as a result of mergers and acquisitions). Smithers believes strong corporate cash flows have supported stocks and are destined to fall because of much needed capital expenditures, which have been delayed.
By Smithers calculations, U. S. stocks are 40% overvalued.
The CAPE indicates there is value to be had in Europe where it stands at 13; below its historical average. Italian stocks are very undervalued as the CAPE there is 8.6.